Another week of volatility with everyday seeing at least 1000 point move to the upside or the downside as everyday has another news item regarding Corona virus. I do believe US markets are reacting some of which to this virus but the biggest driver of the moves is in the bond market. This week saw US bond markets the 2 year,10 year and the 30 year bonds were all trading below 1% and the fear is that these bonds would trade at negative yields. This had all the bank shares on both sides of the border take a hit and then to throw fuel on the fire Saudi Arabia and Russia decide to go into an oil price war and increase production (this is actually good for consumers). I have said all along there is a social shift in fossil fuels coming and this speeds up this movement. We were fortunate enough to remove the majority of our oil exposure for good sized gains and only lost on the last two that were removed. To show some of the carnage we sold Cenovus at $12 just a couple of weeks ago and now it trades around $4. This is just one, the whole sector has way too much debt and with oil under $30 dollars I expect more carnage in this area and we will continue to avoid this area. With oil debt potentially to get restructured this has rippled through our Canadian bank stocks and we have always been told it is manageable however the fear is that it will not be. Our banks are very well capitalized and even if they had to write down the exposure I do not see dividends being effected. Which means even though I don’t like the current pricing I do not see this lasting at these levels.
Not all is bad , even though interest rates are going down our inflation linked bonds that we own have been rising which tells me that once the virus passes the expectations for the economy to continue growing will be in place and inflation will be rising. This did not happen in the carnage of 2008 financial crisis.
I am not getting too aggressive currently and have been nibbling at positions on the downdrafts. This is a cleansing period that is necessary and when the dust clears there will be some great companies that will stop going down and start to rise and that is when I will become more aggressive.
expect more headlines and more volatility but I also do feel this will end soon so don’t get caught up in the headlines. We are doing our best down here to look through this and get some good long term deals.
Paul Belous, CIM
Vice President, Portfolio Manager
RBC Dominion Securities Inc.